Tuesday, January 29, 2008

Frugal Dad's 7-Day Turnaround

The Frugal Dad is posting a week of turnaround tips. I thought I might go along for the ride and post the results at the end of the week.

Day 1: Take an inventory of your finances.

This is basically a look at net worth, taking all the debt totals and asset totals and looking at the difference. It's encouraging to me to be debt-free except for the mortgage -Thank you, Dave Ramsey! I find the mortgage scary, though, and think of it as a debt rather than an investment, so debt totals are something I'd like to have at zero.

Day 2: Build an emergency fund, quickly.

The first of Dave Ramsey's "Baby Steps" is to have $1,000 to start an Emergency Fund. The Frugal Dad is advocating a minimum of 3 months of living expenses or $10,000 for this fund. He recommends getting the fund up to the $1,000 mark within a month by selling stuff and taking opportunities to earn extra. I'm wondering what tomorrow's step will be. Dave's next step after the $1,000 emergency fund is paying off all debt except for the mortgage, after which he places the 3-6 month emergency fund. I'm curious about how The Frugal Dad's approach will differ at this point, since both plans have 7 points.

Day 3: Cut up those credit cards.

I actually did this one a while back. We canceled my card and canceled all the gas cards. But then I was stuck keeping enough cash around to pay for gas, and I don't like carrying around $20 bills. He suggests debit cards as a substitute, but I just don't trust debit cards. I'm afraid of having my checking account emptied and having my own legitimate checks bounce. With a credit card the billing errors can be worked out while I still keep my money in the checking account. I've since gotten a new credit card which is used only for gas and paid off every month. I feel better with this plan.

Dave Ramsey doesn't have the elimination of credit cards as one of his baby steps. It's more of a prequel to the baby steps for him.

Day 4: Slash your expenses.

Frugal Dad offers several specific suggestions:

Gym memberships are usually the first to go.

We've never had gym memberships, so this day is starting out easy.

Consider canceling the cable.

We did this several years ago. So far so good.

Adjust your W-4.

We make quarterly estimates. We do try to be accurate and send the correct amount, but some years we end up paying too much and some years we end up owing. During years when we send too much we just have it applied to the following year's tax estimates. We do not do our taxes ourselves, because we think it's too complicated and we are afraid of making a mistake. "Do right by the IRS" is a motto to live by.

Brown bag it.

We eat out only occasionally. Lunches out are paid for out of personal "allowances". We get a set amount out of each of The Husband's paychecks for personal discretionary spending.

None of these suggestions are radical. In addition to the things he lists we're also doing things like keeping the heat down, switching to fluorescents from traditional incandescent bulbs, using cold water and half the recommended amount of laundry detergent for all our laundry, using half the recommended amount of automatic dish-washing detergent, buying clothes at the Goodwill store, buying some items (toilet paper, paper towels, bar soap, shampoo and conditioner) at Sam's, eating much less meat, increasing the deductible on our car insurance, canceling all our magazine subscriptions, buying books at the local used book store rather than buying books new even for gifts for immediate family since none of us object to receiving used items as gifts...

Day 5: Start saving for retirement.

Saving 15% towards retirement is Dave Ramsey's 4th step, after the baby emergency fund, paying off all debt except for the mortgage and building up a 3-6 month emergency fund.

Frugal Dad makes lots of sense here, of course, suggesting we do the planning it takes to come up with a specific financial goal for retirement, that we take advantage of employer offerings and that we use the Roth IRA.

Day 6: Give the gift of education.

Frugal Dad had several posts over the week-end but none on the 7-Day Turnaround. It looks like the 7-Day Turnaround takes 9 days. (grin)

College funding is Dave Ramsey's 5th step. My first 2 kids got full scholarships, and we're trying to free up enough disposable income so we can cash-flow child #3 at a state school if he is not so fortunate. It's too late for us to have the kind of savings plan for college that Frugal Dad recommends, but we're committed to getting the kids through college without debt.

Day 7: Invest for an early retirement.

Since I'm over 50 and I "retired" for the first time when my first child was born, it's a bit late in time for me to plan ahead for an early retirement. In fact, I'm looking at returning with pleasure to the work force when my youngest goes to college.

Frugal Dad recommends investing outside of retirement accounts, remembering taxes and working towards having monthly expenses covered by investment income.

Dave Ramsey's plan has "Build Wealth and Give" as the 7th step, with nary a mention of retiring early, and his plan is closer to our needs. Because The Husband is a preacher with a love of the ministry, retirement is not the goal it might be for someone whose job is just a way to make money. The Husband's goal is not retirement, though we do realize how important it is to plan for the retirement that will someday be required.

Frugal Dad's plan, as Dave Ramsey's plan did before it, made me realize how obsessed I am with the mortgage. I do seem to live for the mortgage pay-off.

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